Automated Valuation Model
Encyclopedia
Automated valuation model (AVM) is the name given to a service that can provide property valuations using mathematical model
ling combined with a database. Most AVMs calculate a property’s value at a specific point in time by analyzing values of comparable properties. Some also take into account previous surveyor valuations, historical house price
movements and user inputs (i.e. number of bedrooms, property improvements
, etc.).
AVM is short for "automated valuation model". Appraisers, investment professionals and lending institutions
use AVM technology in their analysis of residential property. An AVM is a residential valuation report that can be obtained in a matter of seconds. It is a technology driven report. The product of an automated valuation technology comes from analysis of public record data and computer decision logic combined to provide a calculated estimate of a probable selling price of a residential property. An AVM generally uses a combination of two types of evaluation, a hedonic model
and a repeat sales index. The results of each are weighted, analyzed and then reported as a final estimate of value based on a requested date.
An AVM typically includes:
In the late 1990s this technology was used primarily by institutional investors
to determine risk when purchasing collateralized mortgage loans.
might be worth in order for them to lend against the valuation.
The advantages of using AVMs over traditional chartered surveyors are that they save time, money and resources (e.g. there are no transport requirements), thus lowering the cost of valuing a property. Many AVMs can be made and used with little cost, so more choices in valuation methodology are also possible.
It is claimed that unlike traditional surveyor valuations, AVM outputs do not suffer from the same fraud risk although certain providers can have their systems manipulated intentionally or otherwise if property features are incorrectly entered.
AVMs are particularly useful in assessing the value of a property portfolio. Using an automated model can also be useful for valuing an individual property where the provider can deliver a suitable level of accuracy.
New build property is particularly difficult to value due to the lack of comparable properties and historic data, however an advantage of AVMs is that they pull on a larger pool of comparables and as such are not prone to incorporating the claimed 'new-build premium', although it would rely on comparables from physical inspections to achieve this. Other data sources used are sometimes misleading due to concealed incentives in recorded sales prices (e.g. Land Registry
). AVMs also do not work particularly well on large blocks of flats
where aspect can have a significant effect on value i.e. Is it facing the river or the gasworks!
Initial concern over the effectiveness of AVMs in falling markets have now been answered as the best performing models have remained highly effective throughout the latest downturns although their use for "retrospective valuations" has contributed to wasteful activity in some areas – this is not a fault of the tools but a lack of appreciation by some of those using them.
Many AVMs are also using transactional data, which may lag anywhere from three to six months. This is a good starting point but still does not account for changes in current market conditions.
These are the only UK AVM providers to have been reviewed by Fitch Ratings and Standard & Poor's
.
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...
ling combined with a database. Most AVMs calculate a property’s value at a specific point in time by analyzing values of comparable properties. Some also take into account previous surveyor valuations, historical house price
Real estate pricing
Real estate pricing deals with the valuation of real estate and all the standard methods of determining the price of fixed assets apply....
movements and user inputs (i.e. number of bedrooms, property improvements
Home improvement
Home improvement, home renovation or remodeling is the process of renovating or making additions to one's home.-Types of home improvement:...
, etc.).
AVM is short for "automated valuation model". Appraisers, investment professionals and lending institutions
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
use AVM technology in their analysis of residential property. An AVM is a residential valuation report that can be obtained in a matter of seconds. It is a technology driven report. The product of an automated valuation technology comes from analysis of public record data and computer decision logic combined to provide a calculated estimate of a probable selling price of a residential property. An AVM generally uses a combination of two types of evaluation, a hedonic model
Hedonic regression
In economics, hedonic regression or hedonic demand theory is a revealed preference method of estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value of each characteristic...
and a repeat sales index. The results of each are weighted, analyzed and then reported as a final estimate of value based on a requested date.
An AVM typically includes:
- An indicative market value for many residential properties nationwide.
- The tax assessor's indication of value, if available.
- Information on a subject property and recent sales history.
- Comparable sales analysis of like properties.
In the late 1990s this technology was used primarily by institutional investors
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
to determine risk when purchasing collateralized mortgage loans.
AVM advantages
AVMs are increasingly used by mortgage lenders to determine what a propertyProperty
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
might be worth in order for them to lend against the valuation.
The advantages of using AVMs over traditional chartered surveyors are that they save time, money and resources (e.g. there are no transport requirements), thus lowering the cost of valuing a property. Many AVMs can be made and used with little cost, so more choices in valuation methodology are also possible.
It is claimed that unlike traditional surveyor valuations, AVM outputs do not suffer from the same fraud risk although certain providers can have their systems manipulated intentionally or otherwise if property features are incorrectly entered.
AVMs are particularly useful in assessing the value of a property portfolio. Using an automated model can also be useful for valuing an individual property where the provider can deliver a suitable level of accuracy.
AVM disadvantages
The disadvantages are that they do not take into account the property condition, as a physical inspection of the property does not occur and therefore the valuation produced assumes an average condition which may not reflect reality. Purchasers relying on an AVM backed mortgage application will need to get separate advice to establish the true condition of the property.New build property is particularly difficult to value due to the lack of comparable properties and historic data, however an advantage of AVMs is that they pull on a larger pool of comparables and as such are not prone to incorporating the claimed 'new-build premium', although it would rely on comparables from physical inspections to achieve this. Other data sources used are sometimes misleading due to concealed incentives in recorded sales prices (e.g. Land Registry
Land registration
Land registration generally describes systems by which matters concerning ownership, possession or other rights in land can be recorded to provide evidence of title, facilitate transactions and to prevent unlawful disposal...
). AVMs also do not work particularly well on large blocks of flats
Tower block
A tower block, high-rise, apartment tower, office tower, apartment block, or block of flats, is a tall building or structure used as a residential and/or office building...
where aspect can have a significant effect on value i.e. Is it facing the river or the gasworks!
Initial concern over the effectiveness of AVMs in falling markets have now been answered as the best performing models have remained highly effective throughout the latest downturns although their use for "retrospective valuations" has contributed to wasteful activity in some areas – this is not a fault of the tools but a lack of appreciation by some of those using them.
Many AVMs are also using transactional data, which may lag anywhere from three to six months. This is a good starting point but still does not account for changes in current market conditions.
AVM providers
| Provider |
|---|
| First American – CoreLogic |
| Hometrack |
| Rightmove Rightmove Rightmove plc is a British-based company that runs www.rightmove.co.uk, an online real estate portal. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.- The company :... |
| UKValuation |
| Calnea Analytics |
These are the only UK AVM providers to have been reviewed by Fitch Ratings and Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
.
External links
- Hometrack Data Systems
- Calnea Analytics
- Mouseprice
- Free UK Property Valuation Tool
- {http://www.rightmove.co.uk Rightmove plc]